valvoline fourth quarter fiscal 2017 earnings...

ValvolineFourth Quarter Fiscal 2017Earnings Presentation

Sam Mitchell, CEOMary Meixelsperger, CFOJason Thompson, VP Finance, Treasurer

November 9, 2017

Forward-Looking StatementsThis presentation contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical facts, contained in this presentation, including statements regarding our industry, position, goals, strategy, operations, financial position, revenues, estimated costs, prospects, margins, profitability, capital expenditures, liquidity, capital resources, capital allocation, including dividends, plans and objectives of management are forward-looking statements. Valvoline has identified some of these forward-looking statements with words such as “anticipates,” “believes,” “expects,” “estimates,” “is likely,” “predicts,” “projects,” “forecasts,” “may,” “will,” “should” and “intends” and the negative of these words or other comparable terminology. In addition, Valvoline™ may, from time to time, make forward-looking statements in its annual report, quarterly reports and other filings with the Securities and Exchange Commission (“SEC”), news releases and other written and oral communications. These forward-looking statements are based on Valvoline’s current expectations and assumptions regarding, as of the date such statements are made, Valvoline’s future operating performance and financial condition, including Valvoline’s future financial and operating performance, strategic and competitive advantages, leadership and future opportunities, as well as the economy and other future events or circumstances. Valvoline’s expectations and assumptions include, without limitation, internal forecasts and analyses of current and future market conditions and trends, management plans and strategies, operating efficiencies and economic conditions (such as prices, supply and demand, cost of raw materials, and the ability to recover raw material cost increases through price increases), and risks and uncertainties associated with the following: demand for Valvoline’s products and services; sales growth in emerging markets; the prices and margins of Valvoline’s products and services; the strength of Valvoline’s reputation and brand; Valvoline’s ability to develop and successfully market new products; Valvoline’s ability to retain its largest customers; achievement of the expected benefits of Valvoline's separation from Ashland; Valvoline’s substantial indebtedness (including the possibility that such indebtedness and related restrictive covenants may adversely affect Valvoline’s future cash flows, results of operations, financial condition and Valvoline’s ability to repay debt) and other liabilities; operating as a stand-alone public company; failure, caused by Valvoline, of Ashland's distribution of Valvoline common stock to Ashland shareholders to qualify for tax-free treatment, which may result in significant tax liabilities to Ashland for which Valvoline may be required to indemnify Ashland; and the impact of acquisitions and/or divestitures Valvoline has made or may make (including the possibility that Valvoline may not realize the anticipated benefits from such transactions or difficulties with integration). These forward-looking statements are also subject to the risks and uncertainties affecting Valvoline that are described in its most recent Form 10-K (including in Item 1A Risk Factors and “Use of estimates, risks and uncertainties” in Note 2 of Notes to Consolidated Financial Statements) filed with the SEC, which is available on Valvoline’s website at http://investors.valvoline.com/sec-filings. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this presentation may not occur, and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

You should not rely upon forward-looking statements as predictions of future events. Although Valvoline believes that the expectations reflected in these forward-looking statements are reasonable, Valvoline cannot guarantee that the expectations reflected herein will be achieved. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by Valvoline or any other person that Valvoline will achieve its objectives and plans in any specified time frame, or at all. These forward-looking statements speak only as of the date of this presentation. Except as required by law, Valvoline assumes no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

All forward-looking statements attributable to Valvoline are expressly qualified in their entirety by these cautionary statements as well as others made in this presentation and hereafter in Valvoline’s other SEC filings and public communications. You should evaluate all forward-looking statements made by Valvoline in the context of these risks and uncertainties.

Regulation G: Adjusted ResultsThe information presented herein regarding certain financial measures that do not conform to generally accepted accounting principles in the United States (U.S. GAAP), including EBITDA,adjusted EBITDA, adjusted net income, adjusted EPS and free cash flow, should not be construed as an alternative to the reported results determined in accordance with U.S. GAAP. Valvolinehas included this non-GAAP information to assist in understanding the operating performance of the company and its reportable segments. The non-GAAP information provided may not beconsistent with the methodologies used by other companies. Information regarding Valvoline’s definition, calculation and reconciliation of non-GAAP measures, including EBITDA, adjustedEBITDA, adjusted net income, adjusted EPS and free cash flow, can be found in the tables attached to Valvoline’s most recent earnings release dated November 8, 2017.

2

Fourth Quarter & Fiscal 2017 Reported Results

Notes on reporting and year-over-year (YoY) impacts

Separation-related items – timing of new capital structure– Increase in interest expense YoY– Transfer of pension plans drives increase in YoY pension income

Key items1

– Q4 Fiscal 2017: $74 million pre-tax, $37 million after-tax• Pension & OPEB remeasurements• Tax Matters Agreement activity• Separation costs • Change in estimate for insurance reserves• Lost tax credit due to voluntary pension contribution

– Q4 Fiscal 2016: $13 million pre-tax, $6 million after-tax– Full year 2017: pre-tax income of $57 million, $21 million after-tax– Full year 2016: pre-tax income of $7 million, $3 million after-tax

EBITDA from operating segments1

– Segment operating income (Core North America, Quick Lubes and International) plus depreciation and amortization

– Excludes certain corporate items, primarily pension income

• Full year cash used in operating activities of $130 million, includes ~$400 million voluntary pension contribution

3

1 For reconciliation of adjusted amounts to amounts reported under GAAP, please refer to Valvoline‘s earnings release dated November 8, 2017, available on Valvoline's website at http://investors.valvoline.com.

(in millions)Q4 FY17

Operating Income $191 $532

Net Income $105 $304

Reported EPS $0.52 $1.49

Fiscal 2017 – A Strong Start for Valvoline

Grew the business in strategic areas

Pursued and closed acquisition opportunities

De-risked the pension plan

Initiated return of capital to shareholders

4

Fourth Quarter & Fiscal 2017 Adjusted1 Results

Q4 & Fiscal 2017 Overview

A good quarter in Q4

– Excellent SSS growth in VIOC– Strong premium mix shift– Solid international volume growth

A great year in FY17

– Progress on our core priorities• Grew volume in key markets across our segments• Added new quick lube stores• Invested in digital initiatives• Returned capital to shareholders

– Invested in SG&A and innovations, faced significant raw material inflation– Delivered record EBITDA from operating segments, strong free cash flow

• Full year free cash flow1 generation of $196 million

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(in millions)Q4 FY17

Adjusted1 Operating Income $117 $475

Adjusted1 EBITDA $129 $517

EBITDA from operating segments1 $111 $447

Adjusted1 EPS $0.33 $1.39

Q1 Fiscal 2017 Highlights

Core North America mix and share gains continue

Q4

– Significant gains in premium mix– Good growth in branded volume – Launched new Easy Pour bottle packaging innovation for DIY

FY17

– Enhanced premium mix – Grew branded volume, indicating share gain in DIY– Launched packaging innovations for Installer and DIY customers– Maintained full-year unit margins despite rising raw material costs

6

Core North America


(YoY Change)Q4 FY17

Total Volume (1)% (2)%

Branded volume 2% 1%

Sales 7% 3%

Premium mix 540 bps 440 bps

EBITDA1 4% (6)%

New Easy Pour Bottle

Precision Pour Spout

Resealable Overcap

Anti-Glug Tube

Centralized Handle

Enhanced CommunicationLearn more at EasyPour.com

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Quick Lubes continues to drive sales and profit growth

Q4– Exceptional SSS growth primarily driven by transactions

• Boosted by new advertising campaign launched in Q3– Added 14 net new VIOC stores

• Strongest quarter of organic unit growth– Signed 8 franchise development agreements

FY17– 11th consecutive year of SSS growth

• Retail model continues to improve• In-store execution and ongoing marketing programs

– Added 59 stores to VIOC system• Franchise expansion• Time-It Lube acquisition

8

Quick Lubes


(YoY Change)Q4 FY17

SSS 8.6% 7.4%

Sales 18% 18%

EBITDA1 11% 13%

VIOC Units(net added in period)

14 59


International continues broad-based volume growth

Q4

– Emerging markets led by China and India JVs, Asia outside of China

– Europe continues to drive mature markets

– Pricing actions implemented in remaining markets to offset cost increases

FY17

– Strong volume growth across emerging markets

– Channel development in Europe, growth in heavy duty in Australia

– Cummins relationship• Technology partnership driving growth inside China• India JV benefiting from brand building and strong execution

9

International


(YoY Change)Q4 FY17

Volume 6% 9%

Volume with JVs 11% 11%

Sales 11% 9%

EBITDA1 (5)% 3%

Factors affecting year-over-year EBITDA from Operating Segments1

Adjusted1 Results for Q4


2 Other includes foreign exchange impacts as well as equity, royalty, and other income/expense.

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($ in millions)Preliminary

Results from Operating Segments 2017 2016Lubricant gallons (in millions) 45.6 44.5 2 %Sales 547$ 494$ 11 %Operating income 99$ 96$ 3 %

Depreciation and amortization 12 10 20 %Earnings before interest, taxes, depreciation and amortization (EBITDA) from Operating Segments1 111$ 106$ 5 %

EBITDA as a percent of sales 20.3 % 21.5 % (120) bp

Total Adjusted1 ResultsAdjusted1 EBITDA in Unallocated & Other 18$ 5$ 260 %Total Adjusted1 EBITDA 129$ 111$ 16 %

Total Adjusted EBITDA as a percent of sales 23.6 % 22.5 % 110 bp

Fiscal Fourth QuarterThree months ended Sept 30,

Change

106 111

410

(10)

1

Q4 2016 Vol/Mix Other2Margin SG&A Q4 2017Acq

0

Factors affecting year-over-year EBITDA from Operating Segments1

Adjusted1 Results for FY17



11


Results from Operating Segments 2017 2016Lubricant gallons (in millions) 179.7 174.5 3 %Sales 2,084$ 1,929$ 8 %Operating income 405$ 403$ - %

Depreciation and amortization 42 38 11 %Earnings before interest, taxes, depreciation and amortization (EBITDA) from Operating Segments1 447$ 441$ 1 %


Total Adjusted1 ResultsAdjusted1 EBITDA in Unallocated & Other 70$ 16$ 338 %Total Adjusted1 EBITDA 517$ 457$ 13 %

Total Adjusted EBITDA as a percent of sales 24.8 % 23.7 % 110 bp

Fiscal YearTwelve months ended Sept 30,

Change

441 447

(12)

36

(25)

3

FY 2016 Vol/Mix Other2Margin SG&A FY 2017Acq

4

Q1 Fiscal 2017 HighlightsNPV positive actions reduce pension risk and volatility$400 million voluntary contribution to U.S. pension plan

Borrowing to fund U.S. qualified pension plan• Reduces risk and volatility• Reduces costs• Net Present Value positive• Leverage neutral

Retiree Annuity Purchase• Reduces risk and volatility• Reduces administrative costs• Transfers nearly $600 million of gross obligations to a third party.

Pension expectations for 2018

Pension & OPEB income reclassified as non-operating• New accounting guidelines reclassify pension & OPEB income as non-operating• Will be excluded from adjusted EBITDA1 and adjusted EPS1 in FY18• FY17 adjusted EBITDA1 included $70 million and adjusted EPS1 included $0.21 of

pension & OPEB income

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Pension De-risking Actions

• Voluntary pension contribution

• Retiree annuity purchase


Fiscal 2017 Q4 Corporate Items

• Effective tax rate of 40.7% for the quarter impacted by geographic mix of earnings and tax treatment of Key Items; full-year effective rate of 38.0%– Adjusted effective tax rate1 of 34.0% in Q4; full-year adjusted rate1 of 34.6%

• Borrowing to fund pension impacted interest expense, operating cash flow and debt– Raised $400 million in new debt to make voluntary contribution to U.S. qualified pension plan– Incremental interest of ~$3 million in Q4 FY17 and ~$15 million for FY18

• Full year capital expenditures totaled $68 million

• Full year free cash flow1,2 generation of $196 million

• Total debt of $1,124 million – Net debt of $923 million

• Net year-end pension and OPEB obligations of $357 million, down $547 million YoY


2 Definition of free cash flow: operating cash flow less capital expenditures and certain other adjustments.

13


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FY18 Guidance

• Growing volume, sales, and earnings

• Adding new quick lube stores

• Removing non-operating pension income from adjusted EBITDA and adjusted EPS1

2018 Outlook

2017 Performance

Operating Segments

• Lubricant Gallons 3-4% 3%

• Revenues 7-9% 8%

• VIOC Company Stores (excluding franchise conversions)

23-25 28

• VIOC Franchised Stores (excluding franchise conversions)

25-35 31

• VIOC same-store sales 4-6% 7.4%

• Adjusted EBITDA1 (excluding pension & OPEB income)

$480-$500 million $447 million

Corporate Items

• Pension & OPEB Income $40 million $70 million

• Adjusted effective tax rate 34-35% 34.6%

• Diluted adjusted EPS1 (excluding pension & OPEB income)

$1.20-$1.28 $1.18

• Capital expenditures $80-90 million $68 million

• Free cash flow1 (inclusive of cash tax benefit for pension funding)

$260-$290 million $196 million


2018 Focus & Expectations – Accelerating Growth

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Core North America

• Continued share and mix gains – innovation, targeted marketing and sales execution• Unit margin expansion• Continued progress on digital initiatives

Quick Lubes• New unit growth• Supplemental growth through acquisitions• Continued SSS growth – customer acquisition/retention tools, ticket opportunities

International• Continued volume growth – channel development, improved products & services• Unit margin improvement• Further leverage Cummins partnership, capturing new OEM opportunities

Appendix

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17

Key Items1 Affecting Income

($ in millions, except per share data)Preliminary

2017Pension & OPEB remeasurements 60$ 60 37 0.18 Tax Matters Agreement activity 14$ 14 - - Separation Costs (5)$ (5) - - Insurance reserve reversals 5$ 5 3 0.02 Lost tax credit due to pension funding -$ - (3) (0.01)

Total 74$ 74$ 37$ 0.19$ 2016

Pension & OPEB remeasurements 23$ 23$ 12$ 0.07$ Separation Costs (6)$ (6)$ (4)$ (0.03)$ Accelerated amortization due to debt repayment -$ (4) (2) (0.01)

Pre-tax After-taxEarnings per Share

Fourth Quarter ImpactTotal

Operating Income


Core North America

18


2017 2016Lubricant gallons (in millions) 24.9 25.1 (1) %Sales 256$ 239$ 7 %Operating income 43$ 42$ 2 %

Depreciation and amortization 5 4 25 %EBITDA1 48$ 46$ 4 %


Three months ended Sept. 30,Change

Fiscal Fourth Quarter

Factors affecting year-over-year EBITDA1

46 48

43

(5)

00




2017 201699.4 101.2 (2) %

1,004$ 979$ 3 %199$ 212$ (6) %15 16 (6) %

214$ 228$ (6) %21.3 % 23.3 % (200) bp

Twelve months ended Sept. 30,Change

Fiscal Year

228 214

(15)

8

(7)

00


Factors affecting year-over-year EBITDA1

Quick Lubes

19


2017 2016Lubricant gallons (in millions) 6.1 5.6 9 %Sales 147$ 125$ 18 %Operating income 36$ 33$ 9 %

Depreciation and amortization 6 5 20 %EBITDA1 42$ 38$ 11 %




38 42

54

(5)

0

Q4 2016 Vol/Mix

Other2Margin SG&A Q4 2017Acq

0



2017 201622.5 20.2 11 %541$ 457$ 18 %130$ 117$ 11 %22 17 29 %

152$ 134$ 13 %28.1 % 29.3 % (120) bp


Fiscal Year

134 152

1214

(12)

04


Factors affecting year-over-year EBITDA1Factors affecting year-over-year EBITDA1

International

20


2017 2016Lubricant gallons (in millions) 14.6 13.8 6 %Sales 144$ 130$ 11 %Operating income 20$ 21$ (5) %

Depreciation and amortization 1 1 - %

EBITDA1 21$ 22$ (5) %EBITDA as a percent of sales 14.6 % 16.9 % (230) bps



22 21

(5)

3

0

1


0

2017 201657.8 53.1 9 %539$ 493$ 9 %76$ 74$ 3 %5 5 - %

81$ 79$ 3 %15.0 % 16.0 % (100) bp


Fiscal Year

79 81

(9)

14

(6)

30


Factors affecting year-over-year EBITDA1Factors affecting year-over-year EBITDA1



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